Developing Muskrat Falls is Best Option –
Reports Released on Waiting Until 2041, Developing Gull Island First and
Other Legal Options

Three reports released today address other suggested alternatives and
help establish that Muskrat Falls is the best option to meet demand needs
and now is the right time to develop this resource. The papers, Upper
Churchill: Can we wait until 2041?, Gull Island: Why not develop Gull Island
first?, and Legal Options: S92A, Good Faith and Regulatory
Proceedings in Quebec were released today by the Department of Natural
Resources.

“Reports released today provide clear, concise information which refute
the suggestion that the province has not explored all options with respect
to Quebec and the Upper Churchill,” said the Honourable Jerome Kennedy,
Minister of Natural Resources. “Our research and studies support the
position that Muskrat Falls is the best option to address demand
requirements for our province.”

The paper, Upper Churchill: Can we wait until 2041?, establishes
that waiting until 2041 is not a viable alternative.

“It is not feasible to defer Muskrat Falls under the assumption that the
province will have cheap or free power in 2041,” said Minister Kennedy.
“Waiting for available Upper Churchill power in 2041 is not a practical,
economical, or sensible alternative to Muskrat Falls.”

Gull Island: Why not develop Gull Island first? highlights that
Gull Island has not proceeded to date because of the inability to obtain
transmission access across Quebec. The paper states that Gull Island remains
an important energy asset should viable sales and market access arrangements
be confirmed, and additional markets and customers would be required to
support the development of Gull Island.

“For 40 years the province has tried to proceed with the Gull Island
development but without transmission access through Quebec the project is
not feasible,” said Minister Kennedy. “At 824 MW, Muskrat Falls is being
proposed for development first because its smaller generation capacity
allows it to economically supply the province with the power it needs over
the long term.”

Legal Options: S92A, Good Faith and Regulatory Proceedings in Quebec
highlights the fact that Newfoundland and Labrador has engaged in numerous
legal actions in relation to the inequity of the Upper Churchill contract
over the years, none of which has been successful to date. This paper
outlines the actions taken including litigation on the Upper Churchill
contract, and includes sections on Section 92A, Good Faith and Regulatory
Proceedings in Quebec.

“We have examined all alternate options to the development of Muskrat
Falls, and all of the results have been the same – Muskrat Falls is the best
option and will ensure we have reliable, least-cost power to support
residential, commercial and industrial growth in Newfoundland and Labrador,”
said Minister Kennedy. “We need to seize this time of unprecedented growth
and opportunity in our province. Our resources must be developed for the
primary and maximum benefit of the people of Newfoundland and Labrador.”

For further information on the discussion papers, see the backgrounder
below. To view the papers in full, please visit:
www.powerinourhands.ca.

In the debate surrounding the development of Muskrat Falls, it has
been suggested that Newfoundland and Labrador has the option of
refurbishing the Holyrood Thermal Generating Station and/or taking other
stop gap measures until 2041 when the Upper Churchill power contract
expires and energy from the Upper Churchill become available for
domestic and export use. This option is not realistic for a variety of
reasons.

Churchill Falls (Labrador) Corporation (CFLCo) is owned by
Newfoundland and Labrador Hydro (NLH) and Hydro-Quebec (HQ) jointly,
with NLH owning 65.8 per cent of the common shares and HQ 34.2 per cent
of the common shares. In 2041, NLH will not have absolute authority over
the corporate actions of CFLCo. It is not appropriate to simply assume
that Newfoundland and Labrador will receive cheap or free power when the
HQ Power Contract expires in 2041.

There is considerable risk and uncertainty regarding security of
supply and reliability, the cost to ratepayers, and environmental
compliance. Deferring the project also means deferring the province’s
ability to fully capitalize on the value of its tremendous energy
resources.

It is doubtful that life extension efforts at Holyrood could
continue to provide reliable power for an additional 30-plus years. At
that time the first two units would be 70 years old. As well,
maintaining the isolated Island system until that time, followed by the
construction of a new transmission link with Labrador, is more expensive
than developing Muskrat Falls.

Deferring Muskrat Falls will mean increased reliance on oil and
volatile prices for electricity as rates will be tied to fuel prices as
well as preventing the province from capitalizing on opportunities
through export sales and/or industrial expansion in Labrador.

Gull Island: Why not develop Gull Island first?

The Gull Island development has not proceeded to date because of the
inability to obtain transmission access across Quebec. The Provincial
Government plans to develop Gull Island, but only if Newfoundland and
Labrador is the principal beneficiary of development.

For years the province has tried to proceed with the Gull Island
development. Without transmission access through Quebec the project is
not yet feasible. Gull Island’s 2,250 megawatt (MW) generating capacity
is far greater than Newfoundland and Labrador will require in the near
future. Therefore, export sales through Quebec are essential for project
success.

The Ontario market is currently the best prospect for Gull Island
exports. Ontario needs new sources of electricity and is in the midst of
making important decisions about long-term supply. Gull Island power
could be part of Ontario’s supply if Quebec would allow fair access to
its transmission.

At 824 MW, Muskrat Falls is being proposed for development first
because its smaller generation capacity allows it to economically supply
the province with the power it needs over the long term.

Legal Options: S92A, Good Faith and Regulatory Proceedings in Quebec

The province of Newfoundland and Labrador has taken numerous legal
actions in relation to the unfairness and inequity of the Upper
Churchill contract over the years, none of which has been successful to
date.

Section 92A

Since 1982, various suggestions have been made as to how Newfoundland and
Labrador might use the powers provided under Section 92A to gain access to
electricity from the Upper Churchill. Section 92A was negotiated as a
solution to disputes between Canada and the provinces about the authority of
the provinces over their energy industries, and where the provincial
authority ended and Canada’s began.

While Section 92A of the Constitution Act could potentially allow for
the recall of Upper Churchill power, this could result in a breach of the
1969 Power Contract under Quebec civil law and potentially result in
billions of dollars in damages. There is no certainty that any attempt would
be successful, or what the cost of such power would be. This litigation
would take years to resolve and, even if ultimately successful, would do
nothing to satisfy the province’s need for power in the near future.

Good Faith

On February 23, 2012 CFLCo commenced a legal action against Hydro Quebec
in the Superior Court of Quebec. Their position is based on the civil law
obligation of good faith. The good faith action is based on the overriding
Quebec civil law obligation for parties to act in good faith and not abuse
their contractual rights.

The Quebec litigation represents an opportunity for CFLCo to remediate
the future pricing disparity of the Power Contract but it does not represent
a means to solve the province’s future energy demand requirements.

Its discussion in the context of being an alternative to the Muskrat
Falls development is misplaced and the good faith action cannot be the basis
of a decision to forego development of Muskrat Falls at this time.

Regulatory Proceedings in QuebecThe availability of open access markets and transparent regulatory
frameworks in the United States for the transmission of electricity should
provide an opportunity for Nalcor to access export markets. These regulatory
frameworks are not enforceable within Canada, and while Hydro-Quebec must
adhere to these rules as they apply to its electricity trade in the United
Sates, the same degree of transparency is not required for electricity trade
within Canada.

Nalcor has attempted to gain access through the transmission system for
the Lower Churchill Project. These efforts have not proved successful,
resulting in regulatory rulings, appeals and ultimately a court challenge.

Nalcor has taken two applications for review in Quebec before the Regie
(the Quebec equivalent of the PUB) for open access to transmit power from
the Lower Churchill across Quebec. The Regie has refused these applications.